Year End Tax Update

December 13, 2020

Don’t waste the annual gift tax exclusion. You can give up to $15,000 to each child, grandchild, or any other person in 2020 without having to pay gift tax or tap your lifetime estate and gift tax exemption. Your spouse can also give $15,000 to the same donee, making the tax-free gift $30,000. For example, if you are married with three children and five grandkids, you and your spouse can give up to $30,000 in 2020 to each relative without gift tax consequences. That’s $240,000 in tax-free gifts. Any unused exclusion amount is gone. You can’t use more next year to make up for it. Annual gifts over the exclusion amount will trigger filing of a gift tax return for the year.  But no gift tax will be due unless your total lifetime gifts exceed $11,580,000. If you’ve been considering a large gift to a family member, now’s the time to do it.

 Here are two ways to help your kids or grandkids with their college education:

  1. Pay tuition directly to the school. The payment is nontaxable to the student, it doesn’t count against the $15,000 gift tax exclusion, and it reduces your estate. Ditto for direct payments to a doctor or hospital to cover a donee’s medical expenses.
  2. Contribute to a 529 plan. You can shelter from gift tax up to $75,000 in contributions per beneficiary this year ($150,000 if your spouse agrees). If you put in the maximum, you’ll be treated as gifting $15,000 (or $30,000) to that beneficiary in 2020 and in each of the next four years…2021 through 2024.

You must ask IRS to withdraw a tax lien once the tax liability is fully paid. The Service will withdraw the lien, provided you have paid your tax bill, IRS has released the lien, and you have been tax-compliant for the past three years. A withdrawal of a tax lien expunges the lien immediately from the debtor’s records, and it is as if the lien had never been filed. Use Form 12277 to request a withdrawal. You can ask for a lien withdrawal even if you haven’t fully repaid the debt, provided the amount that you currently owe the Service doesn’t exceed $25,000 and you agree to pay off the rest via monthly debits from your bank account.

Good news for owners of traditional IRAs who turn age 72 this year. You needn’t take your first required minimum distribution. The CARES Act waives RMDs for 2020 from traditional IRAs, 401(k)s and many other retirement plans. If you turn 72 in 2020, your first RMD, which would generally be due by April 1, 2021, is also waived, according to the staff of the bipartisan Joint Com. on Taxation. Thus, your first RMD would be for 2021, which must be paid to you by Dec. 31, 2021.  People who took out an RMD in 2020 have until the later of Aug. 31 or 60 days after the withdrawal to put the money back into the account and treat the distribution and subsequent redeposit as a tax-free rollover.

Taxes withheld on returned RMDs can be recovered on your 2020 return, which you file next year. Say you took out a $25,000 RMD from your IRA on Jan. 20, opted to have 20% in federal taxes withheld, and repaid $25,000 to your IRA by Aug. 31. The $25,000 is treated as a tax-free rollover for federal income tax purposes. You would claim the $5,000 withheld as taxes paid when you file your 2020 1040.

More bad news from IRS for firms that took out paycheck protection loans.   In May, the agency issued public guidance saying that small businesses that have their Paycheck Protection Program loans forgiven cannot deduct expenses that result in forgiveness of the loan. IRS now says firms can’t deduct such expenses paid or incurred in 2020 if firms reasonably expect at year-end to receive forgiveness of the debt in 2021. This is so even if the taxpayer hasn’t yet applied for forgiveness of the PPP loan before the end of 2020 (Revenue Ruling 2020-27). Lobbying groups continue to press Congress for a legislative fix.

Let’s review some practical ways you and your business can save on taxes. The tax laws provide very generous write-offs for business asset purchases: 100% bonus depreciation. Firms can deduct the full cost of qualifying assets, new or used, with lives of 20 years or less, that they buy and place in service this year.

Expensing. Businesses can expense up to $1,040,000 of new or used assets in 2020. This limit phases out dollar for dollar once more than $2,590,000 of assets are placed in service. Additionally, the amount expensed can’t exceed taxable income.

Buying a new or used passenger auto for your business can lead to tax breaks. If bonus depreciation is claimed, the first-year depreciation cap is $18,100 for vehicles bought after Sept. 27, 2017 and put in use this year. The second- and third-year caps are $16,100 and $9,700. After that…$5,760. If no bonus depreciation is taken, the first-year regular depreciation ceiling ends up falling sharply to $10,100.  

Buyers of heavy SUVs used solely for business can write off the full cost, thanks to bonus depreciation. SUVs must have a gross weight rating over 6,000 pounds.  Up to 100% of the cost of a big pickup truck can be expensed. As noted above, total amounts expensed can’t exceed the business’s taxable income.

Heed the timing rules for charitable donations and other tax-deductible items. Mail checks by year-end to lock in a 2020 write-off. For charges made with a bank credit card, you claim the write-off in the year you charged the expense. The rules differ for nondeductible gifts. If making a gift by check, the recipient must deposit it by Dec. 31 for it to count as a 2020 gift for gift and estate tax purposes. Make the most of your generosity when donating to charitable organizations.

Contribute appreciated assets, such as stocks or shares in mutual funds.  Provided you owned the property for more than a year, you can deduct its full value in most cases if you itemize. Neither you nor the charity pays tax on the appreciation. Don’t donate property that has declined in value since you acquired it. If you do, the capital loss is wasted. You’re better off selling it, claiming the capital loss on your tax return, and then donating the proceeds to the charity of your choice. You can’t deduct the value of your time spent doing charitable work.